Virginia Restores Tax Fairness, Competitiveness and Predictability to Government Contractor Community
Change in Tax Policy a Culmination of 10-year NVTC effortHERNDON, Va., July 5, 2006 - Virginia's new budget places Virginia government contractors on a more level playing field with contractors in other states by reversing an administrative tax policy which, for more than a decade, has imposed Virginia's sales tax on certain pass-through purchases made by Virginia companies on behalf of government customers. Since the early 1990s, the "True Object Test" placed Virginia government contracting firms at a major price disadvantage when competing with firms in other states and addressing this issue has been a longstanding NVTC priority. A change in federal contracting practices over the last several years led to the unintended taxation in Virginia of certain purchases made for resale to the government. As a result, Virginia was the only state known to levy its sales tax, now 5 percent, on purchases made for resale to the government as part of a services contract.
The application of the "True Object Test" also interjected unpredictability into Virginia's government contracting community. Many firms, especially smaller companies, did not even realize they owed the sales tax until they were audited by the Department of Taxation three years after the fact and were assessed unbudgeted taxes, fees and penalties.
NVTC member Pat Herrity, CFO of Arrowhead Global Solutions and a leader on this issue, noted, "In many cases, it is difficult to anticipate during the bidding stage if the Department of Taxation is going to deem a particular transaction taxable or not. To some extent, it is a subjective determination made by the Department after the fact. If a company knows about the tax and builds it into their proposal assuming it is an allowable cost, they come in high and risk losing to firms in other states. If the company is unaware of the tax or its application, it can be particularly disruptive when they learn of the unanticipated tax liability three years later during an audit, especially given the low profit margins associated with many of Virginia's federal contractors in the technology space."
NVTC, which had identified the provision as an unfair tax imposed on Virginia government contractors, has been an aggressive advocate of its reversal for the past ten years, leading to state studies, pilot projects and legislative bills that paved the way for the Governor and the General Assembly to reverse the tax policy this year.
NVTC President and CEO Bobbie Kilberg notes, "We have been at this for a while and finally reached critical mass this year. NVTC's lobbying team had a full time presence in Richmond and this issue was of high priority for us. We saw strong interest and advocacy from business groups across the state and a recognition that the impact extended beyond technology and beyond Northern Virginia. We had strong business leadership in NVTC, the Professional Services Council, the Greater Washington Board of Trade, the Virginia Chamber of Commerce and other local chambers of commerce and technology councils. We had strong executive leadership in Governors Tim Kaine and Mark Warner, both of whom introduced the fix in their budgets. We had strong legislative leadership from many, including Speaker Bill Howell, Senators Chuck Colgan, Jeannemarie Devolites Davis, and Janet Howell; and Delegates Jeff Frederick, Tim Hugo, the late Harry Parrish, Ken Plum, and Steve Shannon."
NVTC Chairman and CEO of Lee Technologies, John Lee, called the action "fantastic news for Northern Virginia's technology community and for the Commonwealth as a whole." He said the change in tax policy removes an incentive for companies to source government contracting work to companies in other states. "Virginia has consistently been a leader in receiving federal contract dollars, ranking second in each of the past five years. Now, the elimination of The True Object Test should fuel even greater growth for our government contractor community, and jobs and tax revenues we generate," he said.
Over the next year, the Department of Taxation will be working with the government contracting community as it prepares to promulgate an emergency regulation to implement the provisions of the new budget language which will apply prospectively to “work orders," "statements of work," and "task orders," entered into on and after July 1, 2006. The Department will specifically include examples to illustrate when a contractor is deemed to have exercised taxable interim use of tangible personal property purchased pursuant to a government contract, as well as examples where exempt interim use is made incidental to a resale to the government. NVTC has invited Virginia's Tax Commissioner to meet with NVTC members to discuss the process early this fall. NVTC also plans to work with the Tax Department over the next year as it drafts and implements these new regulations.
